Selling Your Lab to a Family Member
Posted Apr 28, 2011 in Management
Only one-third of family businesses pass from the first generation to the second and a mere 12% succeed into the third generation, according to the Family Firm Institute. Family conflicts, lack of interested successors and limited access to capital are typical stumbling blocks, however, the most common problem is lack of planning.
Planning effectively for the key needs of a family laboratory--retirement of the founder, estate planning and transfer of assets and training the successors--takes at least 15 years. "The owner really has to begin planning well in advance so that he doesn't put the business into debt in order to fund his retirement. Life will be a whole lot easier if you start planning when you're 50 rather than when you're 60," advises Sutton Landry, director of Northern Kentucky University's Small Business Development Center and Family Business Center.
In addition to the financial intricacies, exit planning in a family-owned laboratory can render emotional dynamics that you don't find in non-family businesses. For example, many times, the founder's goal is to create a lasting legacy for future generations of his family. His personal identity becomes intimately tied with the laboratory and often he doesn't want to let go and a power struggle can ensue. In a non-family business, the successor is shielded from these emotions but not so in a family business where the patriarch can jump back in--or at least try to.
"I was lucky because my father never second-guessed me. Based on what I hear from other people who have taken over their family's businesses, I've had it easy," says Jerry Neuenschwander, president, Johns Dental Laboratories, Terre Haute, Indiana. "However, working with family members is always a challenge. The biggest thing you need to remember is that there is a business perspective and a personal perspective."
Family business experts agree that a council of family members can be a tremendously helpful venue in which to deal with emotional issues as well as handle strategic planning. For instance, if there are a number of children in the family, it's typical for parents to be concerned about sibling rivalries. "Ironically, in a family meeting, the parents often learn that only one child is really interested in taking over the business," says Landry. "Once you've cleared the air and bring everyone's goals out in the open, you can begin talking collectively and planning for succession."
You can also include non-family members which can prove valuable even long after the succession takes place. For example, Johns Dental Laboratories has a board of directors made up family members, other employees and outside advisors such as the lab's banker, a representative from its accounting firm and other business owners. "We meet about three or four times a year. It's good to get outside perspectives on your business and it forces you to think critically about your plans because you have to present them to other people," explains Neuenschwander, who took over the third-generation laboratory in 1989.
Given the potential for conflict, independent advisors can be extremely valuable to a family-run laboratory and numerous other resources are available, including courses, newsletters and books. In addition, there are about 130 university-based family business centers around the country; membership fees typically range from $300 to $4,000 per year. "These centers give you the opportunity to network and discuss your problems with people in similar situations. It's comforting to know that your concerns aren't unique," says Landry.
Passing the entrepreneurial torch: To help smooth the transition from one generation to the next, there are four key areas to consider:
A personal financial plan for the current owner. The retiring owner needs to determine how much money he'll need in the future and have a plan for how he will meet those needs (see How Much do you Need to Retire above). For example, he might want to take significant bonuses and invest the money to fund his retirement. Or, if he owns the building that houses the laboratory, he might want to retain ownership and charge rent to generate retirement income.
An estate-wealth transfer plan. There are numerous ways to structure the buy-sell agreement such as trusts, life insurance options, private annuities and limited family partnerships. Simply put, however, the main goals are to provide the retiring owner with income, transfer ownership to the next generation under terms which they can afford and minimize estate taxes. (Although the Bush tax cut calls for the elimination of the federal estate tax, it still retains its current form--albeit at reduced levels--until 2010.) Since estate planning is such a complicated process, it's best handled with the help of an estate-planning attorney, accountant or financial consultant.
A leadership succession plan designates the role of each family member and a timeline for the transfer of responsibilities. While there will always be bumps in the road, the retiring owner can help ease the transition if he helps his successors develop the skills and expertise they need to manage the laboratory.
A post-retirement plan. The successive generation will have an easier time running the laboratory if the first generation is enjoying retirement. "Retirees who haven't planned for their leisure time are often lost, especially during the first year," says Landry. "Specialists who help people plan for 'the third semester of life' are becoming increasingly popular."
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